Microsoft profits miss Wall Street estimates

Breaking news: Microsoft today reported fourth-quarter profits of 46 cents a share, just short of Wall Street expectations, and trimmed its earnings forecast for the full fiscal year.

Analysts had been expecting earnings of 47 cents per share.

Update, 1:55 p.m.: The lackluster bottom line came despite quarterly revenues of $15.8 billion — which exceeded both Wall Street’s estimates and Microsoft’s previous forecast for the quarter. So what happened to the profits? Colleen Healy, Microsoft’s general manager of investor relations, said in an interview that costs surpassed expectations for the quarter in part because the company sold more enterprise consulting services and Xbox 360 consoles than it had been expecting. Those are costly parts of Microsoft’s business.

In addition, Healy said, the company brought servers in its data centers online faster than it had been expecting, as part of its online services strategy. That further increased costs for the quarter, she said.

The company also adjusted its financial forecasts: For the current fiscal year, which began this month, Microsoft is now projecting earnings per share of $2.12 to $2.18. That’s down one penny on both sides from the company’s projections a quarter ago.

Asked about that decrease, Healy said Microsoft is planning to spend more to build its online services businesses — trying to boost awareness of its Live Search engine and further develop the company’s advertising system. Microsoft will also invest more in its MSN portal, she said. Microsoft has said it is focusing more on “organic” online growth since withdrawing its Yahoo acquisition bid.

Update, 2:20 p.m.: Revenues in the Client (PC Windows) division were stronger than Microsoft and analysts had expected, at $4.4 billion, or 15 percent growth. That was a reversal from the third quarter, when Client revenues missed expectations. Healy attributed the result to strong Windows Vista sales, saying that the company has now sold more than 180 million Vista licenses since the operating system was launched. In addition, she said, the company benefited from progress against piracy during the quarter.

It was a “solid quarter” for revenues, but the lowered guidance reflects the economic realities facing the company, wrote Goldman Sachs analyst Sarah Friar just now in a note to clients.

More to come, including a breakdown of the divisional results. Microsoft’s conference call with analysts starts at 2:30 p.m. Pacific time. Anyone who’s interested can listen to the webcast via this page.

Entertainment and Devices: Revenue $1.58 billion, up 37 percent;
Loss shrinks to $188 million, down from $1.2 billion a year ago.

Of note: For the full fiscal year, ended June 30, the Entertainment and Devices Division reached its goal of operating profitability — posting a $426 million annual profit, despite the loss this quarter.

Companywide, Microsoft posted annual revenues of $60.42 billion, an increase of 18 percent over last year. Profits were $17.6 billion, up more than 25 percent, although that increase is artificially high because last year’s profits were diminished by the billion-dollar charge taken by the company for Xbox 360 malfunctions.